The number of buyout-backed companies that made Standard & Poor’s notorious “weakest links” list fell to 59 last month, down from 60 three months earlier. Although that is generally good news, at least four of the companies leaving the list did so because they defaulted on their debt.
Overall, the number of companies on S&P’s “weakest links” list released on Aug. 12 fell to 278. That was down slightly from the 293 listed on May 15, 2009, which in turn was down from a peak of 300 in April of this year. To make the list, companies must have a speculative corporate credit rating of ‘B-’ or lower, along with either a negative outlook or a negative CreditWatch implication.
The downward trend follows the same pattern displayed three months ago, in part because the number of defaulters continues to rise. So far in 2009, there have been 201 defaults with combined debt of $453.1 billion, up from 126 defaults last year representing combined debt of $233 billion.
The 59 buyout-backed companies on the latest “weakest links” list had combined affected debt of $64.9 billion, down from $77.6 billion three months earlier. Among the additions since May 15, 2009, CDW Corp. contributed the most debt, with $4.1 billion. S&P downgraded the Vernon Hills, Ill.-based provider of technology products and services to ‘B-’ from ‘B’ on May 27 in part because of CDW’s declining EBITDA and highly leveraged financial profile. CDW is in the portfolio of both
Eleven portfolio companies dropped off the report in the last three months.
Among LBO-backed companies, four industries had the highest concentration in the latest “weakest links” report. These sectors accounted for more than half of the total. The retail and restaurants sector continued to lead the way with nine representatives on the latest tally. This is down from 11 in May. Media & entertainment; chemicals; packaging and environmental services; and high technology each had seven portfolio companies in the August report. On the overall list of 278 companies, those operating in media, entertainment, forest products, building materials, banks, and retail/restaurants were most vulnerable to debt defaults.
Other firms with at least two investments on the August “weakest links” report were
In at least four cases, the portfolio companies joined S&P’s list of defaulters. This includes Apollo Management and TPG’s Harrah’s Entertainment Inc. and Warburg Pincus’s CCS Medical Inc. unit, which filed for Chapter 11 bankruptcy protection in July.
There have been at least 50 defaults involving LBO backers so far this year, including two companies that did it twice. (KKR.’s NXP B.V. and Carlyle Group and
Seven of the defaulters come from
Buyouts separately tracked at least 65 portfolio companies that filed for bankruptcy protection this year as of Sept. 2. The number rose from 46 three months ago.
At least four of the companies on the list have emerged from Chapter 11.
Sun Capital reacquired a majority stake in Anchor Blue Retail Group Inc. on Aug. 27. The retailer filed for bankruptcy protection in May. Sun Capital also acquired Big 10 Tire Stores Inc. out of Chapter 11 on July 1. Both Anchor Blue and Big 10 Tire were previously in Sun Capital’s portfolio prior to their bankruptcy filings.
One of the more recent bankruptcy filers, Reader’s Digest Association Inc., sought protection on Aug. 24, after a drop in advertising spending hurt the magazine publisher.